The UK Government's intervention in the banking sector may result in developers paying back millions in VAT.
The UK government's majority shareholding in a number of UK banks has significant implications for developers. If a developer has a bank as a tenant or as a prospective tenant the developer may need to repay HM Revenue & Customs (HMRC) VAT claimed on development costs - which could potentially run into millions of pounds.
What is the issue? The supply of land and buildings in the UK is VAT exempt unless a choice is made by the supplier (e.g. a developer in its capacity as seller or landlord) to tax it. This is known as the "option to tax". This option is subject to certain anti-avoidance provisions which may disapply the option and prevent VAT being charged if a tenant or prospective tenant is connected to either the developer or the developer's funder.
Does this apply to all tenants or prospective tenants? No - this only applies if the tenant or prospective tenant intends to occupy the property wholly or mainly for an exempt purpose.
What is an exempt purpose? Exempt purpose means simply that the person occupying the business will use it for a purpose which is classified as exempt from VAT.
HMRC set out a list of supplies they deem to be exempt and providing financial services is one of the exempt supplies listed.
-
What does this mean for developers?
There are two potential consequences for developers:
A. Irrecoverable development costs
If the UK government has a majority stake in two banks it is likely that these banks will be connected for VAT purposes. This means that if a tenant or potential tenant is, for example, a member of Lloyds Group and a developer has development finance from the Royal Bank of Scotland the VAT incurred on the development costs may be irrecoverable.
B. Purchase price reductions
If a developer sells a development, provided that certain conditions are met, no VAT is payable as the transaction is deemed to be a transfer of a going concern for VAT purposes.
If a potential purchaser however is funded by a Government owned bank, and the developer has as a tenant or prospective tenant another Government owned bank, VAT may become payable as the transfer of a going concern conditions are not met. If VAT becomes a cost the purchaser may attempt to renegotiate the purchase price as the purchaser will not be able to recover all of the VAT payable.
-
There is a cash machine operated by a Government controlled bank within my development – do these anti-avoidance provisions apply to cash machines?
No - HM Revenue & Customs announced in June 2008 that cash machines will not trigger the anti-avoidance provisions.
VAT rules may be complicated but expert advice can reduce complexity and decrease risks and costs. We would be pleased to set up a meeting to review your options and to discuss how we may be able to assist you.
About the McGrigors' Developers Team:
Our extensive experience in the full range of property development transactions means that our team are genuine specialists who can contribute at every stage of any given project from strategic and structuring advice through to ultimate implementation.
EWAN ALEXANDER
Partner, Real Estate
Tel +44 (0)131 777 7027
Email ewan.alexander@mcgrigors.com
| 
